Tag Archives: investment advice

Economic Collapse Scenario

investmentsMy Comments: I know, I know, I sound like a broken record. Last Friday I spoke to a gathering of about 100 retired people. And fear of the markets was shared by almost all. For many, uncertainty itself causes fear, but when added to the doubts about how to avoid the inevitable, it becomes palpable.

I first heard about Harry Dent in the 90’s when he published a book that talked about the DOW at 20,000. By the time 2001 arrived, that idea had been pushed onto the dustheap of history. Only now it’s not so far fetched given the markets highs reached last week.

Nevertheless, Mr. Dent is a prodigious economic thought leader and these comments sound all too familiar. If you haven’t yet put your money where it will be protected from the next downturn, you should. Talk with me.

Harry Dent Nov. 5, 2014

Summary
• From late 2014 to early 2015, the scene will be ripe for a major shift in the markets.
• Global growth has been declining steadily from a peak in late 2009 of 5% to a low of 2.2% in mid-2012 and 2.7% recently.
• Stocks from emerging markets represented by EEM are down 20%+ in recent weeks with its pattern suggesting a drop to at least $27 in the coming year.

The third round of QE is finally over. And stocks keep edging up. They’ve been slower than in 2013 and the recent correction took them temporarily into negative territory. The trend currently is that investors simply have nowhere else to go with bonds fluctuating constantly and commodities faring even worse.

Despite the slowing of affluent spending ahead in the U.S., it continues to look stronger than Europe. China’s economy is consistently slowing and Germany is not doing well at all… these are all things we’ve warned were coming.

But even after the 10% setback into October 15 for stocks, they’ve roared back stronger than ever. This may be the final hoorah for the “market on crack.” The Fed has rigged the markets so there’s nowhere else to go, but stocks and the bulls keep running… and they’ll run until they’re out of steam, which looks like it’ll be very soon at this point.

Today’s latest surge comes from another doubling down on QE from the most desperate country in the world, Japan. This is insanity!!!

I see a big shift coming by looking at chart patterns across financial sectors… The clearest one is the Megaphone pattern on the Dow (and many other sectors like the Russell 2000 for small-cap stocks).
megaphone 1995-2020Each bubble over the past 14 years has taken the markets to new highs in 2000, 2007 and now 2014, but each crash has also taken us to new lows. I’ve been predicting the Dow would peak just over 17,000 and then fall to a level between 5,500 and 6,500 depending on when the bottom trend line above is tested.

Throughout 2013, the Dow gained 25%. Yet if you look at the last bull run from mid-November 2012 to the end of 2013, the Dow gained 33% – from 12,500 to 16,600. At its top on September 19 of this year and the retest of that today on October 31, the Dow only gained 4.2% at best.

Why? It’s hitting resistance at the top trend line of this massive Megaphone pattern… and the Fed is tapering and taking away the punch bowl.

Not including China, the emerging markets are the only ones that still have strong demographic trends, but they’ve stayed consistently down since early 2011. Why? They correlate much more with commodity prices than with the U.S. and other developed countries stock markets.

Commodity prices are down about 27% since late April 2011 and stocks from emerging markets represented by the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) below are down 20%+ in recent weeks. Look how EEM has traded between $36 and $45 since September of 2011 in a long A-B-C-D-E sideways channel.

This consolidation should be about over and it should break strongly, regardless of whether it is up or down. The best interpretation was that the recent high peak (E) that broke back to the top of the channel at $46 was the final wave up.

This pattern suggests a drop to at least $27 in the coming year, especially if it pushes below that $36 level ahead convincingly. That’s 41% down from the recent high… and that’s just the next drop coming most likely in the next year. That would only be consistent with a continued fall in global growth.

In respect to gold, most people are keenly aware that its prices have been plodding along in a sideways pattern since May of 2012, with a distinct line in the sand around the two bottoms it hit when it neared $1,180. Gold broke below that level today. Hence, another drop is likely approaching with the next support at around $700. Oil is also close to breaking down from a long sideways pattern at just below $79. It could fall as low as $10 to $20 in the next several years.

Another commodity that best represents global growth is copper. Its horizontal movement has been going on since about May of 2013. It’s been hovering near $3 recently, but keeps bouncing off of $3. If it falls much below $2.90… it’ll be curtains for copper, commodities in general and global growth.

Global growth has been declining steadily from a peak in late 2009 of 5% to a low of 2.2% in mid-2012 and 2.7% recently.

Here’s the bottom line. From late 2014 to early 2015, the scene will be ripe for a major shift in the markets. The chart patterns and our fundamental indicators and cycles all strongly suggest it will begin slipping down starting in early 2015 at the latest.

Be selling on rallies, especially as the Dow hits one more new high at 17,400+. Look to get out a little before rather than after a peak as bubbles like this one will burst quickly… just as gold’s did in early 2013.

5 Answers Every Investor Needs to Know About Annuities

retirement_roadMy Comments: Giving answers implies there are questions that need answers. And anyone asking about personal money these days needs to know more about annuities.

Not because you should necessarily put money into them, but because they are uniquely qualified to provide solutions that can can be found no where else. It turns on whether or not your quest for financial freedom includes concerns and issues that other choices do not resolve.

The financial industry is constantly coming up with better products. And coming up with worse products whose sales language is designed to confuse and frighten you. So beware. Talk with people who work explicitly for YOU, and not for someone else. This is a long article so you may have to bookmark it and come back later.

Article added by Daniel Williams on October 20, 2014

From Oct. 15-17 many of the major players in the annuity world gathered in Scottsdale, Ariz. at the Westin Kierland Resort & Spa for the 2014 IMO Summit. Prior to the Event, NAFA sent out a paper, “Answers every investor needs to know about annuities,” that can benefit advisors as well as consumers.

On the following pages, NAFA answers five of the most important questions you’ll ever receive about annuities. These nuggets can be vital in helping producers educate clients and prospects on annuity products.

1. What kinds of returns can I expect with an annuity?

There are two types of annuities: fixed and variable. Variable annuities earn investment returns based on the performance of the investment portfolios, known as “subaccounts,” where you choose to put your money. The return earned in a variable annuity isn’t guaranteed. If the value of the subaccounts goes up, you could make money. However, if the value goes down, you could lose money. Also, income payments to you could be less than you expected.

Fixed annuities earn interest and not “returns.” This is an important distinction because investments earn returns and a rate of return calculates investment losses as well as investment gains. Life insurance and fixed annuities earn interest. Since there are no investment losses in an insurance product like fixed annuities, the use of “return” is confusing and misleading.

Unfortunately, mixing up these two distinct concepts is a common mistake made by those who don’t sell or understand fixed annuities and who, perhaps, make their living selling risk-based investments. With fixed deferred annuities, the insurance company either calculates and determines the interest to be credited based on the insurance company’s earnings (for set or declared rate annuities) or based on the positive performance of a market index (for indexed annuities).

The National Association of Insurance Commissioners (NAIC), which regulates fixed annuities, considers both products fixed annuities, regardless of how interest is calculated. All fixed annuities, including indexed rate and declared rate annuities, guarantee you will not suffer losses because the markets do.

2. Is it true that indexed annuities can limit how much interest I earn?

The main difference between fixed indexed annuities and other forms of fixed annuities is the way interest is calculated. And, just as you don’t receive all of the positive earnings from the insurance company investment portfolio in a declared rate annuity, you do not earn all of the positive index performance in an indexed annuity.

The insurance company must pay for the insurance guarantees of the annuity, as well as the usual and customary company expenses to develop, market and service the annuities sold. Insurance companies use participation rates and caps in indexed annuities to pay for these expenses and ensure profitability.

A participation rate or a cap can be raised up or down, reflecting current market and economic conditions. During strong economic times, these rates and caps will be higher; during weak or negative economic times, they will be lower. This flexibility is advantageous for the consumer: the annuity contract adapts to market conditions while also being protected with minimum guarantees and suffering no losses because the index change is negative.

Sometimes folks that “hate” annuities like to show “hypothetical” performances of an indexed annuity by cherry picking economic cycles or other market variables. But, since indexed annuities have been sold for almost 20 years, we have studies that review actual interest earnings paid into the annuity contract using a statistical sample of over 300 real-life indexed annuity contracts. NAFA encourages you to read the full academic paper called, “Real-World Index Annuity Returns.”

The authors of this study are often called upon to discuss real, historical scenarios, not hypothetical examples using select periods, explaining how fixed indexed annuities actually perform for their owners.

3. Okay, so please explain about the kinds of expenses associated with the annuity?

It is common for those who do not sell fixed annuities and engage in negative advertising about annuities to confuse concepts and features between fixed and variable annuities. Both types of annuities can play a role in financial and retirement planning, but it is important to understand the differences between the two products.

Fixed annuities have charges (called surrender charges) that are made only when you take money out of the annuity. Most fixed annuities allow you to take a certain amount of money without paying any charges, but if you take more, the amount over the maximum will be charged a penalty. Also, if you terminate your annuity contract early, before the charges have expired, you will pay a surrender charge.

All charges, and under what conditions they are imposed, must be clearly explained in the documents you receive both before and after you purchase the annuity. Fixed annuities may also offer riders that provide additional benefits and features, and you may be charged for those riders. All insurance companies are required by law to fully disclose all charges and under what circumstances they may be incurred. This information must be disclosed both before you buy the annuity and in the insurance policy you receive from the insurance company.

Also, unlike investment products, all annuity policies issued come with a money-back guarantee, called a “free-look period,” during which time you can return and cancel the policy and receive ALL of your entire premium back. This is an insurance guarantee and consumer protection that investment products do not provide.

4. Can you explain why there are surrender charges?

The insurance guarantees of complete protection from market losses, income for life, minimum interest, and additional interest above the minimum are not free and are an expense to the insurance company. As with any company, there are other costs of business, including: regulatory compliance, mandated reserving, product development, marketing, and servicing annuity customers. In order to pay for the expenses and the mandated reserves required to remain a solvent and a viable business, the insurer invests the premiums it receives.

However, like any investment, it can only cover the expenses and profit requirements if it retains the investment for a sufficient period, often several years. If an annuity contract is cancelled too early, these expenses will more than likely be greater than their investment returns, and the insurance company will suffer a loss. It is left to the insurance company to determine prevention measures to avoid a loss. All prudent buyers of financial products want their company to operate at a profit.

So, the question becomes, what do you consider the fairest loss prevention method? Some methods assign the cost of offsetting the potential loss to all buyers, whether they surrender their contracts early or not. By contrast, the surrender charge method imposes the burden of repaying unrecovered expenses only to those who caused the loss by not fulfilling the contractual obligation. There are fixed annuities with no surrender charge and some with 12-year surrender charges — and everything in between.

Surrender charges must be properly explained and understood by the consumer considering purchasing an annuity. Surrender charges are the best tools for ensuring that all consumers receive the most competitive interest rate and annuity features possible and that the insurers are adequately protected from a “run on the bank.”

5. Is it true that many income riders are beneficial only if the annuity performs poorly and that they require turning my annuity into a stream of income payments?

When you hear or read about income riders, it is extremely important to understand what information is applicable to variable annuities and what information is applicable to fixed annuities. Variable annuities have market risk, and the value of the subaccounts chosen could go up or down. If they go up, you could make money. If they go down, you could lose money. Also, income payments to you could be less than you expected. By contrast, many fixed indexed annuities have a baseline income guarantee, and you can also utilize performance of the annuity to increase the guaranteed income exponentially.

Fixed indexed annuities available today do not require annuitization on their income riders. These income riders for fixed annuities (typically called guaranteed lifetime withdrawal benefit riders) provide a guaranteed income stream, typically a percentage of the premium, but the income stream lasts your entire life, even if your annuity account value falls to zero.

Most income riders allow you to turn the income payments on and off or take out the money remaining in your annuity that has not been paid out or withdrawn by you. An income rider should not be confused with annuitization, available in all fixed deferred annuities, which guarantees the amount you will be paid and guarantees that you can receive those payments as long as you live.

The key difference between an income rider and annuitization is that with the income rider you still own and have control of the annuity account value. With annuitization, you convert all value to a promised payment stream.

Originally published on LifeHealthPro.com

Guess Who’s Back? The Middle Class

My Comments: There is lots of handwringing about last Tuesdays election results. And lots of people looking for someone to blame if it didn’t meet hopes and expectations.

One of my long time concerns has been the growing inbalance between the haves and the have-nots. Statistically it’s very real with the middle class that evolved and grew after WW2 now faltering and fading. That has huge implications for all of us and the quality of our lives going forward.

This article has been on my post-it-someday list since this past summer. It suggests the middle class is making a comeback. What is so perverse for me about the election results is that while I understand why the “haves” are naturally Republican, I find it difficult to understand why so many of the “have-nots” vote Republican. They are the ones most likely to fall down the economic rabbit hole and yet they seem happy to do so.

posted by Jeffrey Dow Jones July 31,2014 in Cognitive Concord

This has been a very important week for economic data. I know everybody saw yesterday’s GDP report coming, but it’s great news nonetheless. It was a blowout, a 4% real increase in the second quarter.

There is no negative way to spin this one. Even personal consumption expenditures rose at a 2.5% rate. Housing bounced back in a big way, with a 7% increase in residential investment. The consumer is alive and well, and given the fact that inventories, durable goods, and other investment all shot much higher, the business world is betting he’ll stay healthy for a while longer.

What’s interesting is what happens when we marry that data to what we saw in the July consumer confidence report. Consumer confidence surged to yet another post-crisis high and is now officially back in the range that, before 2008, we would have called “normal”.
CONTINUE-READING

5 Reasons Why You Should Be Afraid Of A Bear Market

question-markMy Comments: Until I found this, I had never heard of hedgewise.com. I make absolutely no assertion that they know what they are talking about. My personal solution for you is quite different from what you read below, but this part of life is almost always a guessing game.

Oct. 30, 2014 http://www.hedgewise.com/

Summary
• The Fed officially just ended its bond buying program, marking the close of a financial era.
• With the bull market now in its 6th year, stocks may struggle to continue their run without the Fed’s help.
• Many significant warning signs are signaling an oncoming bear market.
• There are smart steps you can take to better hedge your portfolio.

1) There have only been 2 longer bull markets in recent history

Beginning in January 2009, this bull market is now in its 71st month. Only two bull markets have lasted longer in the past century, during the 1920s and the 1990s.


2) Price-to-earnings ratios are approaching 2006 levels

The widely-recognized “Shiller-PE” ratio compares average inflation-adjusted earnings from the previous 10 years to the current price of the S&P 500. This helps to smooth out variance over time caused by natural fluctuations in the business cycle. The current level of the Shiller-PE ratio of over 25 is near that of 2006 and well above the mean of 16.5. While this does not indicate an imminent collapse, history would suggest that the stock market may not be the best investment for the next ten years.


3) The Fed is removing the punch bowl

Interest rates have been at historic lows for the past five years. This has created a sensational environment where stocks are one of the only reasonable investment options. However, the Fed just stopped their bond buying program altogether, and interest rates can only go in one direction. Moving forward, the market faces a cruel double-edged sword. If there is strong growth, it will prompt the Fed to begin raising rates, causing investors to demand higher returns and businesses to cut back. If there is weak growth, it will threaten corporate earnings and spark worries about another recession. Either way, stocks may fall.

4) The volume of the October rally has been light

October was a rollercoaster ride for the markets. While most of the losses have been offset here at month-end, the gains have occurred with relatively light trading volume. This suggests that the major players aren’t the ones buying.


5) Global growth is shaky

As recently studied by Larry Summers, India and China may be on the brink of a major slowdown. China has experienced a 32-year streak of extremely rapid growth, perhaps one of the longest streaks in all of history. Its economy is supported by approximately six trillion dollars of ‘shadow debt’, which may eventually create major systemic issues. While the US may not be the primary source of the next global slowdown, it would still certainly be a victim of the ripple effect.

How to Protect Your Portfolio (by hedgewise.com)

The two most likely scenarios for the economy are a rising interest rate environment with moderate growth, or a continued global slowdown which carries the risk of another recession. Unfortunately, US stocks face an uphill battle in both cases. If the Fed begins to raise rates, it will be a drag on both stocks and bonds. If rates remain low, it will probably only be due to a poor overall economic environment.

If you are seeking alternatives for your portfolio, you may want to consider a few contrarian investment options. When the Fed does raise rates, it will probably be on the heels of stronger growth and higher inflation. In that environment, Treasury-Inflation Protected Bonds (NYSEARCA:TIP) can help keep you safe from the rising price level, and commodities like gold (NYSEARCA:GLD) and oil (NYSEARCA:USO) may outperform due to a weaker dollar and stronger demand. On the other hand, if a significant slowdown occurs, investors may flee back into the safety of Treasury bonds (NYSEARCA:TLT), sending interest rates down yet again. Since it is unclear how the future will unfold, it may be wise to hedge your portfolio with some or all of these investments for the time being.

The Fiendish Bond Market Needs a Radical Rethink

My Comments: In keeping with my recent posts that suggest a strong market correction is coming soon, some readers have suggested the solution is to shift away from stocks into more bonds. I remind them that interest rates have been declining since 1981 and they too will reverse course at some point. When they do, you do not want to hold ANY long term bond positions.

The dilemma is that short term bonds have such lousy returns that they are almost meaningless. By the time you’ve paid taxes on the earnings, assuming they are not municipal bonds, and dealt with inflation, you have gone broke safely.

So this is an interesting read. Not sure it will or can happen. But if you are worried, we need to talk as there is a glimmer of hope that you can take advantage of.

Stephen Foley / October 29, 2014 4:42 pm

A trader works on the floor of the New York Stock Exchange minutes after a Federal Reserve announcement on January 29, 2014 in New York City. This was another Fed announcement of another reduction in its monthly bond buying program.

Shares in Verizon rose. Or they fell. Whichever, the point is that it is easy to keep track. The US telecoms group has one kind of share, whose price zips along the bottom of business news channel screens or pops up when you hover in FT.com stories. Would that it were so simple to keep track in the bond market.

Companies issue such a dizzying number of different bonds that it is impossible to focus the same light on the fixed income market as on equities. In the past, although bond investors grumbled, the opacity did not matter to companies one jot. But the market has changed and it matters now.

There are $7.7tn of corporate bonds outstanding in the US alone, financing business investment and economic growth (as well as, more recently, share buybacks that have plumped up equity markets). Fixing the market’s flaws is vital. It is time for a radical rethink of how companies issue debt.

Verizon, which holds the record for the most money raised on a single day in the bond market, has more than 70 kinds of bond out. When it sold $49bn of debt last year it did so in eight slices, each a different kind of bond paying a different interest rate and maturing on a different date. In the market last week, it raised another $6.5bn with bonds maturing in seven, 10 and 20 years. And Verizon is one of the more restrained issuers.

General Electric, whose shares are among the most widely held in the US, has more than 900 kinds of bond outstanding. Banks have even more: Citigroup had 1,865 separate types when Barclays counted them in April.

The inevitable result is that trading in any one bond issue is very thin, especially in those sold more than a year ago. Finding another investor who wants to buy the exact type of bond you are selling is no easy task at the best of times. If the end of quantitative easing marks the start of rising interest rates, which hurt bond prices, then investors’ 30-year love affair with fixed income may cool, and the market could become dicey indeed. Regulators worry about potential systemic risks in the event that sharp price falls in illiquid bond markets lead to big investor losses.

What is required is for corporate bonds to be standardised so that there are fewer of them trading more frequently. It is the principle adopted by the biggest debt issuer in the world – the US Treasury, which auctions new bonds on a strict timetable and whose 10-year Treasury note is the de facto benchmark for the fixed income market. The derivatives market, often described as the Wild West of the financial markets, is also highly uniform in parts.

Companies ought to increase the size of each individual bond issue to boost secondary market liquidity. They ought to adopt common interest payment dates. And they ought to issue debt on a regular timetable, perhaps quarterly for the biggest issuers, so that all bonds mature on the same dates. The easier it is for investors to make like-for-like comparisons, the more willing they will be to trade.

Corporate treasurers might ask what is in it for them. Right now they dip into the market opportunistically, trying to time it to catch the lowest possible borrowing costs. The trade-off is that standardised bonds that are more readily tradable by investors are likely to attract more demand, which itself will lower companies’ borrowing costs. Reducing complexity should also cut research and administration costs for borrower and bond investor alike.

Europe Must Act Now

My Comments: By now you may be tiring of my posts that say a market crash is coming and yet here we are moving along merrily. But like a broken clock that is correct at least twice every day, I’m confident that a crash will happen before long, and it won’t be a slow decline to the bottom. It might not last long, but it will be dramatic.

The latest economic news from Europe is not encouraging. They mostly took a different tack in their response to the economic meltdown that happened in 2008-09 and the result is a profound lack of liquidity. How do you reverse course and pump money into the system to make it work again if there is no money?

A version of this article first appeared in the Financial Times. By Scott Minerd, Guggenheim Investments

In recent conversations—whether with the U.S. Federal Reserve, the European Central Bank, the U.S. Treasury, or the International Monetary Fund—one theme is playing large and loud: things in Europe are bad and policymakers appear already to have fallen behind the curve. Quantitative easing in Europe is coming, but too slowly to avert a severe slowdown and perhaps even a hard landing.

The depreciation of the euro, while welcome, will not be enough to lift the economy out of the doldrums and more must be done both in terms of monetary policy and fiscal reforms. In plain language, France must start taking significant steps to reduce social benefits and improve its fiscal balance (a bitter pill to swallow). Germany must reduce its fiscal surplus, which Chancellor Angela Merkel appears ready to do through increased military and infrastructure spending. Italy must move to reduce its fiscal structural imbalance. Others on the periphery must do their part too by staying the course on austerity and continuing with further structural reform. The European Investment Bank stands ready to support infrastructure investment, but at a scale that currently appears too small to make much of a difference.

In the meantime, the ECB will work as quickly as it can to expand its balance sheet. The problem is simply that there may not be enough assets to buy. Mario Draghi, ECB president, has made it clear that the ECB must increase its balance sheet by at least €1 trillion—a tough mandate as the balance sheet will continue to shrink in the coming year as the earlier longer-term refinancing operation assets roll off. The reality is the ECB will need to purchase at least another €1.5 trillion in assets, and even that may not be enough.

The much heralded asset-backed securities purchase program will only yield about €250 billion to €450 billion in assets over the next two years. More LTRO (or the newer targeted LTRO) will prove a challenge as sovereign bond yields in Europe are so low that a large balance sheet expansion through this means seems impractical. Perhaps there is another €500 billion to €750 billion to do over the next year or two. Outright purchases of sovereign debt would prove politically difficult, as many would interpret such purchases as violating the ECB’s mandate, and the matter would probably end up in the European courts.

Current Tools Will Not Get Job Done

The bottom line is that none of the tools currently on the table will get the job done. There are not enough assets to purchase or finance and the timetable to get anything done is too long. Policymakers do not have the luxury of a year or two to figure this out. The ECB balance sheet shrinks virtually daily and as it shrinks, the monetary base of Europe is contracting and putting downward pressure on prices. Europe is clearly in danger of falling into the liquidity trap, if it is not already there. The likelihood of a “lost decade” like that experienced in Japan is rapidly increasing. The ECB must act and act quickly.

How is this affecting the markets? The recent rally in U.S. fixed income is materially different than when rates last approached 2 percent. Previously, the Federal Reserve was actively managing the yield curve to reduce long-term borrowing costs in order to stimulate the economy. The current rally is caused by a massive deflationary wave unleashed upon the United States by beggar-thy-neighbor policies in Europe and Asia.

Rate Hike in 2016 or Later?

The precipitous decline in energy and commodity prices, and competitive pressures on prices for traded goods, will probably push inflation, as measured by the Fed’s favored personal consumption expenditures index, back down toward 1 percent. This raises the likelihood that any increase in the policy rate by the Fed will be pushed into 2016 or later.

With inflationary expectations falling and the relative attractiveness of U.S. Treasury yields over German bunds and Japanese government bonds, U.S. long-term rates are likely to continue to be well supported with limited room to rise, a dynamic that could push them lower from here.

In the real economy, the decline in energy prices should offset the effect of reduced exports, which is supportive of U.S. growth in the near term. This should help equities recover from the recent storm of volatility as we move deeper into the fourth quarter, which is a time of seasonal strength for the stock market. However, this may prove to be the rally to sell. Results from currency translations for large, multinational companies will likely weigh heavily on S&P 500 earnings in the first half of 2015.

It is too early to be making decisions for next year, but the events overseas provide ominous portents of things to come. If we do get a sign of a bear market in U.S. equities, it could be that the events in Europe presage what lies ahead for the United States. Is it too late to change these shadows of dark foreboding? It is hard to tell but time is not on our side.

Banquo’s Grain and U.S. Interest Rates

My Comments: I had no idea what or who is/was Banquo. Nor why ‘grain’ has any relevance. But I like to share the thoughts of this writer from time to time as his insights are often right on the mark. Remember what I said last week about the possibility of rising interest rates in the next three years.

The U.S. economy is strong enough to suggest higher interest rates ahead, but a number of factors suggest U.S. Treasury yields could move lower.

October 02, 2014 - Commentary by Scott Minerd, Chairman of Investments and Global Chief Investment Officer for Guggenheim Investments

Early in Shakespeare’s “Macbeth,” Lord Banquo asks the prophetic three witches, “If you can look into the seeds of time, and say which grain will grow, and which will not, speak then to me.” Banquo’s turn of phrase reminds us that if a farmer planted the wrong grain he could yield a poor harvest, or worse, he might even starve.

I thought about this recently when asked about the outlook for U.S. interest rates. Investors, like farmers, have a sense of the seasons that guides which grains, or investments, are more likely to yield favorable results. While I have no special divining powers, I can draw on our macroeconomic research team that employs the not-so-mystical forces of data and analysis.

Based on macroeconomic research, we estimate “normalized” real interest rates could justifiably be 100 basis points higher than they are today. The U.S. economy is certainly doing well enough to suggest higher interest rates ahead. With quantitative easing ending in the United States this month and the U.S. Federal Reserve preparing investors for a higher federal funds rate in 2015, the stage is set for U.S. interest rates to move higher. But that may not be the grain that grows: The reality is that, despite a strengthening U.S. economy, the greater risk is that interest rates head lower, not higher, in the near future.

Looking at the world today, there are a number of forces that could keep rates low. The first is the impact higher rates would have on the U.S. economy. Remember what happened following the “taper tantrum” last year? Before rates were able to reach historical norms, the average rate on a 30-year mortgage spiked almost a full percentage point in two months—the sharpest rise since the late 1990s—resulting in an abrupt housing slowdown, which slowed the U.S. economy materially. The impact of higher interest rates on the housing market and the broader U.S. economy is something the Fed is extremely mindful of, especially after the first quarter winter soft-patch where the U.S. economy contracted by 2.1 percent.

Next, U.S. Treasury yields are materially higher than those in any other developed market. The spread between 10-year U.S. Treasuries and comparable German bunds reached 157 basis points in September, its widest level since 1999. After inverting in late 2011, the Treasury/bund spread has steadily risen for the past three years as U.S. yields have moved higher while German rates have dropped. The spread between 10-year Treasuries and 10-year Japanese government bonds is now 189 basis points. With developments in the Middle East resembling something from the Bible’s New Testament Book of Revelation and turbulence continuing elsewhere from Ukraine to Hong Kong, the relative price value of U.S. government bonds versus other safe haven investments should continue to be a factor keeping U.S. interest rates low.

Elsewhere in financial markets, the U.S. stock market is vulnerable to higher volatility over the short term. I told my investment team in a meeting on Sept. 23 that, were I a trader, I would tell them to go short stocks, but I am not a trader, I am an investor, and the long-term trends of this bull market still look solid. To paraphrase Shakespeare’s witches, while in the near term something wicked may come this way to markets, the evil portends of this wicked season of volatility may sow new seeds of yet one more rally for U.S. stocks and bonds.

Chart of the Week :Foreign investors will likely look to the United States for higher yields on government bonds as foreign central banks increase monetary accommodation in their own economies. Historically, rising foreign purchases of U.S. Treasuries have pushed U.S. yields lower. So far in 2014, foreign buying has accelerated—a trend likely to continue, putting downward pressure on U.S. Treasury yields.